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The sale was void even though the debtor’s right to redeem the tax lien expired and
the auction sale commenced prior to the bankruptcy filing, because the sale wasn’t
concluded
until after RW Meridian LLC filed its Chapter 7 case, Bankruptcy Judge Meredith A.
Jury said in her Feb. 3 opinion.

RW Meridian owned about 58.5 acres of unimproved land in Imperial County, Calif.,
but had not paid property taxes on the parcel for more than five years, the court
said. The county commenced proceedings to foreclose on its tax lien securing $167,000
in unpaid taxes.

The tax sale was scheduled for Feb. 6, 2016. The debtor’s right to redeem the property
by paying off the debt expired the previous day, the court said.

After the auction sale began, but before a final bid was accepted, RW Meridian filed
a petition for relief under Chapter 7 of the Bankruptcy Code. In Chapter 7, a debtor
company’s assets are liquidated by a trustee, and the proceeds are distributed to
creditors.

Filing for bankruptcy imposes an automatic stay under the Bankruptcy Code, which halts
all judicial proceedings against the debtor or its property. A party must get court
permission to lift the automatic stay in order to proceed with an action against the
debtor or property of the bankruptcy estate.

Despite knowing of the bankruptcy, the county went ahead and accepted the highest
bid. The county then filed a motion in the bankruptcy court on Feb 11, 2016, seeking
a “comfort order”—an order confirming that it wasn’t necessary for the county to get
relief from the automatic stay.

In its motion, the county relied on
In re Tracht Gut, LLC, 503 B.R. 804
(BAP 9th Cir. 2014), which held that relief from the stay wasn’t required to record
a tax sale that was concluded before the bankruptcy filing of the property holder.

The bankruptcy court denied the motion and held that the sale was void as a violation
of the automatic stay. The BAP affirmed, noting that
Tracht Gut was not applicable on the facts. In that case, the sale was concluded by accepting
a bid
before the bankruptcy case was filed, the court explained. Only the recording of the deed
occurred after the bankruptcy filing, which the
Tracht Gut court found permissible.

The court said that as of the bankruptcy filing date, the debtor still held title
to the property as well as a contingent right of redemption under California law.
Accordingly, the Chapter 7 trustee would be allowed to sell the property to a third
party buyer
(the sale price was sufficient to pay off the tax liens, the court said).

Bankruptcy Judges Robert J. Faris and Scott H. Yun (the latter sitting by designation)
joined in the opinion.

The California State Association of Counties and the California Association of Country
Treasurers and Tax Collectors filed “friend of the court” briefs in the case.

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